11 Important Terms in Your Salary Structure

India is bubbling with millennials who work for MNCs or private corporations and draw a monthly salary. Sadly, many do not clearly understand the components of their net wage or take-home salary. Are you one of those who come across terms such as CTC, LTA, and PF on your salary slip but barely know what they mean?  It is essential for you to know your salary breakup so that you can make sound investments and create reasonable monthly budgets.

mymoneykarma gives you the ins and outs of your salary breakup and provides information on the 11 most important components of salary structure. This article is a guide to understanding your salary slip better.

Basic Salary

This part of your income is the base salary that your employer gives you, based on your experience and designation in the organization. This part of the salary is fixed and is paid to you irrespective of any other factors.

CTC

Your total salary or popularly known as Cost-To-Company (CTC) is the total amount that the company ends up spending on you. The CTC includes your perks, allowances, reimbursements, and other annual components such as gratuity, bonus, and variable pay. It also consists of gratuity and provident fund contribution. This rough equation sums up your CTC:

CTC = gross salary + PF + gratuity

Gross Salary

Gross salary is your basic salary coupled with all other allowances that you get before the deduction of any taxes. The contributions include your annual bonus, house rent allowance, overtime pay, and your dearness allowance. You can calculate the gross salary with the following equation.

Gross salary = basic salary + HRA + other allowances.

Net Salary

Your take-home salary is your net salary. You get net salary when you subtract all deductions and applicable taxes  from your gross salary as per the company policy. You can calculate the net pay as per the equation given below:

Net salary = (basic salary + HRA + other allowances) - (income tax + employer's provident fund + professional tax + health/life insurance).

Allowances

Allowances are perks given by the company to you for meeting various service requirements. The amount and number of these contributions in your salary vary from organization to organization. Here are the most common types of allowances.

1. House rent allowance or HRA: This consists of an amount of money designed to cover expenses involving rent or accommodation.

2. Leave travel allowance or LTA: This consists of an amount of money designed to cover expenses related to your travel within the country for business purposes. LTA only includes various travel fares; food and accommodation expenses aren’t covered by this allowance.

3. Conveyance allowance: This consists of an amount of money designed to cover your office commute expenses.

4. Dearness allowance or DA: This consists of an amount of money designed to help you tackle the effects of inflation. DA is given only to government employees, public sector employees, and pensioners.

5. Medical allowance: This consists of an amount of money designed to cover the cost of your medical treatments or procedures subject to the company's policies.

EPF

Employer Provident Fund or EPF is a mandatory contribution in India and consists of an amount from both your employer and you, which collate to become a lump sum for your retirement benefits. Your employer contributes typically 12% of your basic salary and deducts the same amount from your gross salary as your contribution. The amount is deposited in your PF account and is also mentioned in your salary slip.

Gratuity

Gratuity is a component of your CTC that you receive from your employer when you leave the job. This amount is deducted monthly or annually and is given to you as a lump sum on your resignation. However, you are eligible to receive gratuity only if you have completed five years with a particular employer.

Health Insurance

Many organizations provide the facility of health insurance or life insurance in the CTC and deduct the premiums from the gross salary of the employees. This amount is not mentioned in your salary slip. However, many companies do not offer health insurance.

ESI

The Employees State Insurance Scheme or ESI is a type of social insurance covering expenses pertaining to maternity, sickness, disablement, or death due to employment. Your employer contributes typically 3% of your basic salary and deducts 1% of your basic salary from your gross salary as your contribution for the first three months. Subsequently, the employer’s contribution increases to 4% of your basic salary.

Professional Tax

Professional tax or PT is the tax levied by the state government to allow you to practice your profession. The fee differs for different occupations, different states, and different CTC amount. The minimum PT amount is Rs 100, and the maximum amount is Rs 2,500 per month. This component is deducted from your gross salary and is mentioned in your wage slip. Since PT is levied by the state government, many Indian states do not deduct it.

TDS

TDS is the contraction of Tax Deducted at Source and indicates the amount deducted by your employer from your CTC as an amalgam of all the taxes due on the CTC amount.

To Sum It Up

In addition to these components, there may also be other components of your salary as salary structure often vary from organization to organization. You should have a comprehensive knowledge of all the terms mentioned in your offer letter and salary slips. In case you have queries, you can contact the payroll division of your company to get them resolved.

This article is purely educational and should not be considered as tax advice. mymoneykarma does not provide tax advice. For tax counsel, please reach out to a tax advisor.